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The Only Way Out Of The Budget Trap


Economic Viewpoint

THE ONLY WAY OUT OF THE BUDGET TRAP

Clear your head of any illusion that President Clinton's budget plan is going to stem the flow of red ink. The business leaders and politicians who are prattling on about how Clinton's plan is going to lower interest rates and free up funds for investment are apparently unaware that the plan itself says it would add $916 billion to the national debt over the next four years. That's $183 billion more than the cumulative deficit of Reagan's first term and $238 billion more than his second term. Moreover, Reagan cut tax rates and built up defense. In contrast, Clinton is raising taxes, cutting defense, and still adding the equivalent of 5 1/2 years of Reagan deficits to the economy in only four years.

Clinton's "honest budget" is just another sham. Higher taxes on Social Security income, user fees, and price controls on doctors and hospitals are all counted as spending cuts. The primitive tax methodology of the plan assumes that higher income-tax rates will produce no modification in anyone's behavior, that higher energy taxes will not raise production costs and lower profits, and that consumer spending, business sales, and employment will all remain unaffected. If interest rates fall, it will be because aftertax incomes and profits are down and because pinched household and business cash flows will not support any new borrowing.

VANISHED PAYOFF. If Clinton's plan represents change, I'll eat every page of it. It mirrors George Bush's 1990 budget plan: Raise the top income-tax rate (Bush from 28% to 31%, Clinton from 31% to 36% or 40%); raise energy taxes (gasoline for Bush, broad-based energy for Clinton); and pump up public-works spending (transportation for Bush, infrastructure for Clinton).

Just like Clinton, Bush promised jobs from his public-works bill and deficit reduction from the higher taxes. Bush's budget for fiscal year 1992 projected a balanced budget in 1995 and a $20 billion surplus in 1996. But here it is 1993, and Clinton projects $300 billion baseline deficits for the very years that were supposed to be delivering the payoff from the budget deal that wrecked Bush's Presidency.

Higher taxes do not stimulate economic growth, and it is economically and mathematically impossible for a tax hike to cut the deficit, as long as government spending is growing faster than the economy. Any successful deficit reduction must be predicated on these basic facts.

There is only one way out mf the red-ink trap: Freeze the overall federal budget until economic growth produces revenues to match the spending. Had this been done under Reagan, it would have required an 18-month freeze. Today, it would take about three years, depending on the size of the deficit and the economy's growth rate.

From 1985 to 1989, federal tax-revenue growth averaged $64 billion annually. If we project this revenue growth into the future, a three-year freeze would knock $192 billion off the annual deficit, which would more or less solve the problem.

WASTE APLENTY. Some people will claim that the budget cannot possibly be frozen. What about entitlements and interest on the debt? First of all, we are talking about freezing the overall level of spending. There is a lot of room for adjustments in $1.5 trillion, which is about the size of the gross domestic product of France or Germany and larger than that of Britain. Every year, the U.S. government spends more than twice as much as Canada produces and 50% more than the entire GDP of Latin America.

It ought to be obvious to everyone that U.S. taxpayers do not receive governmental services equal in value to the total production of France or the combined GDP of all of Latin America and Canada. Citizens Against Government Waste, headed by former State Dept. official Alan Keyes, has identified $167 billion of waste, fraud, and abuse in the federal budget, a sum equal to the GDP of sub-Saharan Africa (excluding South Africa).

A high official in the General Accounting Office told my office that he can confirm $150 billion in waste, fraud, and mismanagement, but that it is not an annual figure since it includes government inventories. The GAO's position is that the government's abysmal bookkeeping is too slipshod and accountability too lacking to arrive at an accurate figure.

Waste of this magnitude is enough to take the pressure of a freeze off valid programs, and declining defense expenditures also provide a cushion. All the government has to do is not add new spending programs for three years, and normal revenue growth will balance the budget.

We could avoid any fears of a fiscal squeeze on the economy by using the second year's revenue growth to cut tax rates. This stimulus would boost growth and partly pay for itself in the subsequent years.

After three years, government spending could resume, but by less than the growth of revenues until the budget is balanced and some of the national debt paid off. A serious government would take this approach. That Clinton's is not serious is evident from the $109 billion in new spending initiatives he wants to add to his record red-ink budget.Paul Craig Roberts


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